Buyer Power and Quality Improvement

Pierpaolo Battigalli (), Chiara Fumagalli and Michele Polo

No 310, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: This paper analyses the sources of buyer power and its effect on sellers' investment. We show that a retailer extracts a larger surplus from the negotiation with an upstream manufacturer the more it is essential to the creation of total surplus. In turn, this depends on the rivalry between retailers in the bargaining process. Rivalry increases when the retail market is more fragmented, when the retailers are less differentiated and when decreasing returns to scale in production are larger. The allocation of total surplus a¤ects also the incentives of producers to invest in product quality, an instance of the hold up problem. This not only makes both the supplier and consumers worse o¤, but it may harm also the retailers.

Date: 2006
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Related works:
Working Paper: Buyer Power and Quality Improvements (2006)
Journal Article: Buyer power and quality improvements (2007)
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